[Federal Register Volume 83, Number 225 (Wednesday, November 21, 2018)]
[Notices]
[Pages 58802-58804]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-25341]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84600; File No. SR-CboeBYX-2018-014]


Self-Regulatory Organizations; Cboe BYX Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To Make Permanent Exchange Rule 11.24, Which Sets 
Forth the Exchange's Pilot Retail Price Improvement Program

November 15, 2018.

I. Introduction

    On July 30, 2018, Cboe BYX Exchange, Inc. (``BYX'' or the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to make permanent Exchange Rule 11.24, which sets 
forth the Exchange's pilot Retail Price Improvement Program. The 
proposed rule change was published for comment in the Federal Register 
on August 17, 2018.\3\ On September 27, 2018, the Commission extended 
to November 15, 2018, the time period in which to approve, disapprove, 
or institute proceedings to determine whether to approve or disapprove, 
the proposed rule change.\4\ The Commission received no comments on the 
proposed rule change. This order institutes proceedings under Section 
19(b)(2)(B) of the Act \5\ to determine whether to approve or 
disapprove the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 83831 (August 13, 
2018), 83 FR 41128 (``Notice'').
    \4\ See Securities Exchange Act Release No. 84297, 83 FR 49959 
(October 3, 2018).
    \5\ 15 U.S.C. 78(s)(b)(2)(B).
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II. Summary of the Proposed Rule Change

    The Exchange proposes to amend Exchange Rule 11.24 to make 
permanent the Retail Price Improvement Program (the ``Program''), which 
sets forth the rules and procedures governing the program and is 
currently offered on a pilot basis.\6\ The pilot is scheduled to expire 
upon the earlier of the approval of this proposed rule change or 
December 31, 2018.\7\ According to the Exchange, the Program is 
designed to attract retail order flow and allow such order flow to 
receive potential price improvement.\8\
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    \6\ In November 2012, the Commission approved the Program on a 
pilot basis. See Securities Exchange Act Release No. 68303 (November 
27, 2012), 77 FR 71652 (December 3, 2012) (``RPI Approval Order'') 
(SR-BYX-2012-019).
    \7\ The Exchange implemented the Program on January 11, 2013, 
and has extended the pilot period five times. See Securities 
Exchange Act Release Nos. 71249 (January 7, 2014), 79 FR 2229 
(January 13, 2014) (SR-BYX-2014-001); 74111 (January 22, 2015), 80 
FR 4598 (January 28, 2015) (SR-BYX-2015-05); 76965 (January 22, 
2016), 81 FR 4682 (January 27, 2016) (SR-BYX-2016-01); 78180 (June 
28, 2016), 81 FR 43306 (July 1, 2016) (SR-BYX-2016-15); and 81368 
(August 10, 2017), 82 FR 38960 (August 16, 2017) (SR-BYX-2017-18).
    \8\ See Notice, supra note 3 at 41128.
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    Under the Program, a class of market participant called a Retail 
Member Organization (``RMO'') is eligible to submit certain retail 
order flow (``Retail Orders'') to the Exchange. A User \9\ is permitted 
to provide potential price improvement for Retail Orders \10\ by 
submitting Retail Price Improvement (``RPI'') Orders, which are non-
displayed orders that are priced at least $0.001 better than the best 
protected bid (``PBB'') or best protected offer (``PBO'') (``PBBO''), 
as such terms are defined in Regulation NMS, and that is identified as 
such.\11\ After an RPI Order is submitted, the Exchange disseminates an 
indicator through its proprietary data feeds or through the 
Consolidated Tape Association/Consolidated Quotation Plan for Tape A 
and Tape B securities

[[Page 58803]]

and the Nasdaq UTP Plan for Tape C securities, known as the Retail 
Liquidity Identifier, indicating that such interest exists.\12\ The 
Retail Liquidity Identifier reflects the symbol for the particular 
security and the side (buy or sell) of the RPI interest, but does not 
include the price or size of the RPI interest.\13\
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    \9\ A ``User'' is defined in Exchange Rule 1.5(cc) as any member 
or sponsored participant of the Exchange who is authorized to obtain 
access to the System.
    \10\ A ``Retail Order'' is defined in Exchange Rule 11.24(a)(2) 
as an agency order or riskless principal that meets the criteria of 
FINRA Rule 53250.03 that originates from a natural person and is 
submitted to the Exchange by a RMO, provided that no change is made 
to the terms of the order with respect to price or side of market 
and the order does not originate from a trading algorithm or any 
computerized methodology. See Exchange Rule 11.24(a)(2).
    \11\ See Notice, supra note 3 at 41128. As more fully set forth 
in the Notice, RPI Orders may be submitted with an explicit limit 
price, or an offset. RPI Orders submitted with an offset are similar 
to other peg orders in that the order is tied or ``pegged'' to a 
certain price, and would have its price automatically set and 
adjusted upon changes to the Protected NBBO. The offset is a 
predetermined amount by which the User is willing to improve the 
Protected NBBO, subject to a ceiling or floor price. The ceiling or 
floor price is the amount above or below which the User does not 
wish to trade. RPI Orders in their entirety (the buy or sell 
interest, the offset, and the ceiling or floor) will remain non-
displayed.
    \12\ See Notice, supra note 3 at 41130.
    \13\ See id.
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    To qualify as an RMO, a member organization must conduct a retail 
business or route retail orders on behalf of another broker-dealer.\14\ 
A member organization must submit the following to the Exchange for 
approval: (i) An application form, (ii) supporting documentation, and 
(iii) an attestation that substantially all orders submitted as retail 
orders will qualify as such. The Program provides for an appeal process 
for a disapproved applicant, and a withdraw process for RMOs. RMOs must 
have written policies and procedures reasonably designed to assure that 
they will only designate orders as Retail Orders if all requirements of 
a Retail Order are met. RMOs could be disqualified if they submit 
Retail Orders that do not meet the requirements of Retail Orders. If 
disqualified, RMOs may appeal and reapply.
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    \14\ See id.
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    Under the Program, there are two types of Retail Orders. A Type 1 
Retail Order will interact with only available contra-side RPI Orders 
and other price improving contra-side interest.\15\ A Type 1 Retail 
Order will not interact with other available contra-side interest or 
route to away markets. The unexecuted portion of a Type 1 Retail Order 
will be immediately cancelled. A Type 2 Retail Order will interact 
first with available contra-side RPI Orders and price-improving 
liquidity, and then any remaining portion will be executed as an 
immediate-or-cancel order.\16\ A Type 2-desiganted Retail Order can 
either be submitted as a BYX Only Order or an order eligible for 
routing.\17\
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    \15\ See id.
    \16\ See id. at 41130-31.
    \17\ See id. at 41131.
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    The Program provides that RPI Orders will be ranked and allocated 
according to price-time priority. Executions occur in price time 
priority. Any remaining unexecuted RPI interest remains available to 
interact with other incoming Retail Orders if such interest is at an 
eligible price.
    A more detailed description of how the program operates, including 
but not limited to how a member organization may qualify an apply to 
become a RMO; the different types of Retail Orders; and priority and 
order allocation of RPI Orders is more fully set forth in the 
Notice.\18\
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    \18\ See Notice, supra note 3.
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    As part of the RPI Approval Order, the Exchange agreed to provide 
the Commission with a significant amount of data to assist the 
Commission's evaluation of the Program.\19\ Specifically, the Exchange 
represented that it would ``produce data throughout the pilot, which 
will include statistics about participation, the frequency and level of 
price improvement provided by the Program, and any effects on the 
broader market structure.'' \20\ The Commission expected the Exchange 
to monitor the scope and operation of the Program and study the data 
produced during that time with respect to such issues.\21\
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    \19\ See RPI Order, supra note 7, at 71657.
    \20\ Id.
    \21\ Id.
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    In the Notice, the Exchange states that it believes that it has 
achieved its goal of attracting retail order flow to the Exchange.\22\ 
The Exchange further states that its analysis of the data collected 
demonstrates that ``there has been consistent retail investor interest 
in the Program, which has provided tangible price improvement to those 
retail investors through a competitive pricing process over the course 
of the pilot.'' \23\ The Exchange also concluded that the data shows 
that the Program ``had an overall negligible impact on broader market 
quality outside of the Program.'' \24\
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    \22\ See Notice, supra note 3, at 41131.
    \23\ Id.
    \24\ Id.
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III. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Rule Change and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \25\ to determine whether the proposal should be 
approved or disapproved. Institution of proceedings is appropriate at 
this time in view of the legal and policy issues raised by the 
proposal. Institution of disapproval proceedings does not indicate that 
the Commission has reached any conclusions with respect to any of the 
issues involved. Rather, as described in greater detail below, the 
Commission seeks and encourages interested persons to provide 
additional comment on the proposal.
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    \25\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\26\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act,\27\ which requires that the rules of an exchange be 
designed, among other things, to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system and, in general, to protect 
investors and the public interest, and which prohibits the rules of an 
exchange from being designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers, and with Section 6(b)(8) of 
the Act, which requires that the rules of an exchange not impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act.\28\
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    \26\ Id.
    \27\ 15 U.S.C. 78f(b)(5).
    \28\ 15 U.S.C. 78f(b)(8).
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    The Program was intended to create additional price improvement 
opportunities for retail investors by segmenting retail order flow on 
the Exchange.\29\ When the Commission initially approved the Program on 
a pilot basis, it explained that it would monitor the Program 
throughout the pilot period for its potential effects on public price 
discovery and on the broader market structure.\30\ The Commission 
expressed its view that the Program should not cause a major shift in 
market structure, but instead, it would closely replicate the trading 
dynamics that exist in the over-the-counter markets to present another 
competitive venue for retail order flow execution.\31\ As explained 
above, the Exchange provides an analysis of what it considers to be the 
economic benefits for retail investors and the marketplace flowing from 
operation of the Program.\32\ The Exchange also concludes, among other 
things, that the relatively modest volume in the Program limits the 
potential impact of the Program on the broader market quality on the 
Exchange, and that Program has not had any significant impact on 
broader market quality.\33\
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    \29\ See RPI Approval Order, supra note 13, at 71655
    \30\ See id.
    \31\ See id. at 71656.
    \32\ See supra notes 20--22, and Notice, supra note 3, at 41131-
38.
    \33\ See id. at 413332; 41337.
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    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a proposed rule change is consistent with the [Act] 
and the rules and regulations issued thereunder . . .

[[Page 58804]]

 is on the [SRO] that proposed the rule change.'' \34\ The description 
of a proposed rule change, its purpose and operation, its effect, and a 
legal analysis of its consistency with applicable requirements must all 
be sufficiently detailed and specific to support an affirmative 
Commission finding,\35\ and any failure of an SRO to provide this 
information may result in the Commission not having a sufficient basis 
to make an affirmative finding that a proposed rule change is 
consistent with the Act and the applicable rules and regulations.\36\ 
Moreover, ``unquestioning reliance'' on an SRO's representations in a 
proposed rule change would not be sufficient to justify Commission 
approval of a proposed rule change.\37\
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    \34\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \35\ See id.
    \36\ See id.
    \37\ See Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 446-47 (D.C. Cir. 2017) (rejecting the 
Commission's reliance on an SRO's own determinations without 
sufficient evidence of the basis for such determinations).
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    The Commission questions whether the information and analysis 
provided by the Exchange support the Exchange's conclusions that the 
Program has achieved its goals, including whether the Program has not 
had a significant impact on broader market quality. The Commission 
seeks additional information and analysis concerning the Program's 
impact on the broader market; for example, additional information to 
support the view that the Program has not had a material adverse impact 
on market quality. The Commission believes it is appropriate to 
institute proceedings to allow for additional consideration and comment 
on the issues raised herein, any potential response to comments or 
supplemental information provided by the Exchange, and any additional 
independent analysis by the Commission. The Commission believes that 
these issues raise questions as to whether the Exchange has met its 
burden to demonstrate, based on the data and analysis provided, that 
permanent approval of the Program is consistent with the Act, and 
specifically, with its requirements that the Program be designed to 
perfect the mechanism of a free and open market and the national market 
system, protect investors and the public interest, and not be unfairly 
discriminatory; or not impose an unnecessary or inappropriate burden on 
competition.\38\
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    \38\ See 15 U.S.C. 78f(b)(4), (5), and (8).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Sections 6(b)(5) and 6(b)(8), or any other provision of 
the Exchange Act, or the rules and regulations thereunder. Although 
there do not appear to be any issues relevant to approval or 
disapproval that would be facilitated by an oral presentation of views, 
data, and arguments, the Commission will consider, pursuant to Rule 
19b-4, any request for an opportunity to make an oral presentation.\39\
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    \39\ Section 19(b)(2) of the Exchange Act, as amended by the 
Securities Act Amendments of 1975, Public Law 94-29 (June 4, 1975), 
grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Act Amendments of 
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 
75, 94th Cong., 1st Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by December 12, 2018. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
December 26, 2018.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CboeBYX-2018-014 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-CboeBYX-2018-014. The 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make publicly available. All submissions 
should refer to File Number SR-CboeBYX-2018-014 and should be submitted 
on or before December 12, 2018. Rebuttal comments should be submitted 
by December 26, 2018.
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    \40\ 17 CFR 200.30-3(a)(57) and (58).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-25341 Filed 11-20-18; 8:45 am]
BILLING CODE 8011-01-P


